Monthly Payment

AWARE Gears New Financing Educational Tools to Help Baby Boomers

WASHINGTON, D.C. - 

Younger buyers might not be the only age demographic that could use some assistance in explaining how the vehicle financing process works.

To help baby boomers as well as consumers of all ages easily research vehicle financing in one place, Americans Well-informed on Automobile Retailing Economics (AWARE) offers multiple, easy-to-use tools on its website.

AWARE members include American Financial Services Association, National Automobile Dealers Association, National Association of Minority Automobile Dealers and American International Automobile Dealers Association, as well as members of these organizations.

“Consumers may get overwhelmed when researching vehicle financing online,” AWARE spokeswoman Susie Irvine said. “Autofinancing101.org contains free, relevant information in one place to help consumers understand the entire vehicle financing process.”

AWARE provides the following tips and resources:

• Set a budget and determine a price range based upon your needs and financial situation, and stick to it. Use the Auto Finance Calculator at www.autofinancing101.org and the AFSA Education Foundation’s Monthly Spending Plan at www.afsaef.org/monthly_spending_plan.cfm.

• Obtain a copy of your credit report and check it for errors. You can obtain a free credit report once every 12 months from each of the three nationwide credit bureaus at www.annualcreditreport.com. The information in your credit report can impact your ability to get credit and your interest rate.

• Become familiar with common vehicle finance terms, such as APR or Annual Percentage Rate, collateral, down payment, and lien. Many of these terms can be found at www.autofinancing101.org/resources/glossary.cfm.

• Understand the difference between buying and leasing a vehicle. Learn more at http://www.federalreserve.gov/pubs/leasing

• Understand the value and price of optional products such as extended service contracts, credit insurance, or guaranteed auto protection. If you do not want these products, do not sign up for them.

• Compare annual percentage rates and other financing terms from multiple finance sources. www.afsaef.org/apply_for_financing.cfm

• Negotiate your finance arrangements and terms.

• Read the contract carefully before signing it.

Additional information in English and Spanish can be found at www.autofinancing101.org.

Questions Arise about Industry’s New Normal

CARY, N.C. - 

From captive finance companies to one-lot buy-here, pay-here dealers, the entire industry is seeing a shift to a ‘new normal,’ which includes smaller down payments, longer terms and negative equity being rolled into a larger financed amount.

While metal is being moved now, trends and buying patterns that might appear three years or more down the road are what industry observers are currently pondering.

“As we shift over to the ‘new normal,’ which is a little bit concerning, right now the belief is the typical consumer goes $400 to $500 on a new car and $300 to $400 on a used car as the monthly payment,” Experian Automotive president John Gray said.

“So how do you get them the most car in that payment structure? As the interest rates have come down, the prices have gone up so you move out the financing,” Gray continued. “The question is still going to come in as interest rates go up in the future, can you put still put a rate out there that puts them in that payment structure? Also, you’re in the car longer so how can you get equity in the car? Is this going to cause the auto industry to think about when people are going to come back into the market?”

Gray’s Experian colleague is considering the same kinds of questions.

Senior director of automotive credit Melinda Zabritski said, “You’ve got extended (loan to value) and loans. Will consumers change their owning patterns?

“For years, consumers would take their car and trade it back in every 36 to 38 months,” Zabritski continued. “It cut back during the recession. But if the consumer still expects to return to market in 3½ years and they’re on a 72- or 84-month loan with a high origination LTV, are they in a position to come back into the market unless LTVs also continue to expand out?”

The latest data from Experian as well as J.D. Power showed these questions aren’t going away any time soon.

According to its latest State of the Automotive Finance Market report, Experian indicated the average amount financed for a new vehicle was $27,430 in Q4 2013, up from $26,691 in Q4 2012. This marked the highest average loan amount for a new vehicle since 2008 and the first time the amount has exceeded $27,000.

Additionally, the average loan amount for a used vehicle during the quarter was $17,974, up $345 from the previous year, which was also a record-high since 2008.

Furthermore, Experian determined new-vehicle interest rates were up to 4.37 percent in Q4 2013 from 4.36 percent in Q4 2012, while used-vehicle interest rates were up to 8.71 percent in Q4 2013 from 8.48 percent in Q4 2012

And the latest analysis from J.D. Power showed long-term loans — classified as loans that are 72 months and longer — accounted for 33.1 percent of new-vehicle retail sales in February, according to data gathered by the Power Information Network (PIN) from J.D. Power.

That pace surpassed the previous record set in September 2012, when 30.6 percent of new-vehicle sales were loans of 72 months or longer.

“Longer loan terms, coupled with the current low interest rate environment, increases the affordability of new vehicles for consumers,” said Thomas King, senior director of PIN at J.D. Power. “This is resulting in strong demand for new vehicles and also record transaction prices.”

King noted that while the increased use of long-term loans has caused concern in the automotive industry about the risks associated with extended purchase cycles, those risks are mitigated by a couple of factors.

First, while 72-month loans are becoming increasingly popular, loans for 24 to 60 months are keeping the average term for new-vehicle loans at 66 months, an increase of only three months since 2009. Second, increased leasing, with typical contract lengths of just 36 months, ensures a healthy supply of future vehicle buyers with shorter purchase cycles.

“Unlike buyers who finance their vehicle and have considerable discretion regarding when to return to market, consumers who lease their vehicle must come back into the market when their lease terminates,” said King. “The current level of leasing means there will be a steady and significant stream of lessees returning to market three years from now.”

J.D. Power also pointed out that while loans of 84 and 96 months are available to consumers, analysts contend such loans have yet to compose any meaningful portion of the auto financing market, with 84-month and longer loans comprising only 3 percent of all sales in February.

Subprime Buyers Finding More Financing for New Models

SCHAUMBURG, Ill. - 

Finance companies still aren’t shying away from giving contracts to subprime consumers based on the fourth-quarter information from Experian Automotive.

According to its latest State of the Automotive Finance Market report, Experian highlighted today that financing became easier to obtain in Q4 2013, as the average credit scores for both new leases and loans decreased from the previous year. The average credit score for a new-vehicle lease dropped 16 points to 719 in Q4 2013 from 735 during the previous year.

The average credit score for new vehicle loans, however, saw a slightly smaller decrease year-over-year, dropping from 724 in Q4 2012 to 715 in Q4 2013.

Analysts determined market share for nonprime, subprime and deep subprime new vehicle loans also rose slightly in Q4 2013 to 34.1 percent from 32.8 percent in Q4 2012.

For used vehicles, Experian noted nonprime, subprime and deep subprime loans accounted for 62.8 percent of all loans, down 1.6 percent from 63.8 percent in Q4 2012.

“We are still seeing remarkable stability in the automotive finance industry, even as lenders continue to ease slightly on credit standards to provide loans and leases,” said Melinda Zabritski, senior director of automotive credit for Experian Automotive. “What makes this good news for consumers is that the more credit-challenged car shoppers who need a vehicle may find that they have more financing options to choose from and can more easily shop around for the best rates and terms.”

As Zabritski referenced, more consumers are choosing to lease vehicles, bringing the share of new vehicles financed with a lease to its highest level since the company began publically reporting the data in 2006.

Experian found that 28.4 percent of all new vehicles financed were leases in Q4 2013, up from 24.8 percent the previous year.

“Leasing continues to grow in popularity among car shoppers, especially those hoping to stay within a strict monthly budget,” Zabritski said. “Our analysis this quarter showed that the average monthly lease payment was $51 lower than the average loan payment, which can make a big difference to consumers trying to stretch their dollar.”

To be exact, Experian discovered the average monthly payment for a new-model loan came in at $471 in Q4 while the monthly commitment to a new-vehicle lease came in at $420.

Other findings from the report showed the average amount financed for a new vehicle was $27,430 in Q4 2013, up from $26,691 in Q4 2012. This marked the highest average loan amount for a new vehicle since 2008 and the first time the amount has exceeded $27,000.

Additionally, the average loan amount for a used vehicle during the quarter was $17,974, up $345 from the previous year, which was also a record-high since 2008.

In other trends:

• Average monthly loan payments for used vehicles were up from $348 in Q4 2012 to $352 in Q4 2013.

• New-vehicle interest rates were up to 4.37 percent in Q4 2013 from 4.36 percent in Q4 2012.

• Used-vehicle interest rates were up to 8.71 percent in Q4 2013 from 8.48 percent in Q4 2012.

• The average credit score for a used vehicle loan rose from 644 in Q4 2012 to 646 in Q4 2013.

KeyBanc Dealer Survey Refutes Inkling of Subprime Pullback

CLEVELAND - 

Evidently dealers who participate in the monthly survey orchestrated by KeyBanc Capital Markets did not see the same conditions in subprime vehicle financing during December as leadership from CarMax noted.

KeyBanc's survey results showed 50 percent of respondents indicated subprime lending availability is loosening and the remainder indicated availability is unchanged. When CarMax conducted its quarterly conference call and announced a new initiative to jump deeper into the subprime financing space, company executives explained how the strategy came as a result of the exact opposite of what KeyBanc's survey participants said.

"In December, CarMax's statement about a pullback they were seeing in subprime financing terms ignited inventory concern," KeyBanc analysts said.

"Our dealer survey and channel check does not seem to support this view and indicated a favorable and improving subprime lending environment in December with 50 percent of respondents who indicated lenders maintained availability of funds to subprime consumers and 50 percent who indicated subprime financing availability was loosening further," they continued.

KeyBanc cited information from CNW Research that noted improving subprime approval rates in December (the latest reported data) at 13.1 percent relative to November's 12.7 percent and October's and September's 12.6 percent.

And CNW's latest Retail Automotive Summary shed even more light on the subject. CNW president Art Spinella indicated that when the firm analyzed used-vehicle buyers, "FICO scores tell a good story about the easing of credit criteria for buying used."

Spinella said nearly 47 percent of all used vehicles financed in December went to consumers with FICO scores of 670 or less.

That availability of financing, especially to consumers with soft credit histories, is projected to boost both used-vehicle performance as well as F&I potential going forward, according to the KeyBanc survey.

Specifically looking at F&I, results showed trends remain favorable as record-high gross profit per unit remains on an increasing trend. KeyBanc found that 50 percent of respondents reported an increase of more $50 in the month of December on a year-over-year basis while 30 percent reported relatively flat results. Only the remaining 20 percent experienced a pullback of more than $50.

"Outlook remains positive largely driven by higher product penetration rates through consistent reviews and training," KeyBanc said.

In the used-vehicle segment, KeyBanc discovered 50 percent of respondents indicated a used-vehicle gross profit per unit increase more than $50 in December on a year-over-year basis. Analysts found that 30 percent indicated gross profit per unit remained the same, and the remaining 20 percent indicated used-vehicle gross profit per unit declined by more than $50 from the same month last year.

"Going forward, we believe headwinds driven by high cost of inventory will stabilize as used-vehicle prices decline in response to improving supply of late-model used vehicles," analysts said.

"We maintain that used car volume will accelerate into 2014 as supply of late-model used vehicles continues to improve," they continued. "Late-model used-vehicle sales have lagged the overall used-vehicle market throughout recovery due to constrained availability as a result of a substantial decline in new-vehicle sales throughout the 2008/2009 timeframe.

"Coming out of the decline, new-vehicle sales have increased at a compound annual growth rate of 12 percent throughout the 2010/2012 timeframe, increasing availability of late-model used vehicles with approximately a two-year lag," KeyBanc pointed out.

"Franchised dealers are likely to benefit going forward as late-model used vehicles tend to re-enter the market through trade-in, allowing franchised dealers first hand opportunity to claim the highly desired inventory," the firm went on to say.

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